The Importance of Properly Completing Your Application for Insurance

Your first formal step in buying life, disability or health insurance is the completion and signing of a written application. The application will ask you questions about your current health and your health history, what doctors you have seen, what illnesses and injuries you have had. Your health status is critical to the insurance company’s ability to evaluate the risk and your completed application for insurance is one of the most important risk assessment tools provided to the insurance company and its underwriters.

Underwriting is intended to ensure that you, as an applicant for insurance, are treated fairly by the insurance company based on your health history and that you are charged an appropriate premium for the coverage they are willing to offer you. One of the basic principles of insurance is that each individual insured pays a premium proportionate to the amount of risk the insurance company assumes for that person.

The primary responsibility of the home office underwriter is to evaluate your mortality (for life insurance) or morbidity (for health insurance), depending on the type of coverage for which you have applied, to determine whether to approve you for coverage, and, if so, on what terms. An underwriting manual provides a guide to suggested action if you have health impairment. The manual helps to ensure that the insurance company treats you fairly.

If you are applying for insurance, you probably have an insurance agent. In most instances, the agent is the legal representative of the insurance company, not your legal representative. The agent plays an important role in the application process. Underwriters rely on the agent to obtain information they need to determine whether you are eligible for coverage. It is your agent’s job to get your answers to every application question, and to accurately and completely record that information in the application. The insurance company relies on the truthfulness of your answers and on the agent to faithfully transfer your answers onto the application.

You rely on the agent’s advice about what needs to be included on the application and how detailed the information needs to be. If you have any doubt, insist on including more information rather than less. For example, if you are asked whether you have smoked in the past 5 years and you stopped 4 years ago, you should report that on the application – even though the agent may tell you it is not necessary. The agent may be influenced by the fact that he wants the company to issue the policy so he will receive a commission from the sale.

If you fail to disclose all information requested on the application, and the underwriter does not discover that information and issues a policy based on the information on the application, the omission may later be discovered in connection with a claim you submit. Then, if certain conditions are met, the insurance company may rescind your policy, canceling it as though it never existed. Such action is based on the underwriter’s determination that if the information had been truthfully disclosed at the time of application, the policy would not have been issued or would have been issued differently.

This practice is sometimes referred to as post-claim underwriting. It means the insurance company asked you, the applicant, for health-related information and issued you a policy based on your responses without doing any independent investigation of your medical history, thereby saving some money. Only when you submit a claim is money spent to investigate your medical history to see if the policy can be rescinded because you did not reveal your entire medical history. The company can, then, avoid paying your claim.

Some insurance companies make a practice of this. In some cases, a court of law has established that the insurance company acted improperly and in bad faith when, instead of processing your claim, they searched for all the things in the application that might justify rescinding your policy to avoid paying the claim. Extra-contractual damages, and even punitive damages, have been awarded against insurance companies in some of these cases. For example, a court in California awarded actual damages and $180,000 in punitive damages against an insurance company for combing through numerous medical records to find a single statement on which to base a policy rescission and claim denial.

If you are ever faced with a situation where an insurance company attempts to rescind, or cancel, your insurance policy for any reason, you should consult an attorney who is has experience in these matters.

Case Studies: The Importance of Properly Completing Your Application for Insurance

Case Study 1: John’s Undisclosed Medical Condition

John, a 40-year-old individual, applied for a life insurance policy through an agent. During the application process, he failed to disclose a previous heart surgery he had undergone. The underwriter, relying solely on the information provided in the application, approved the policy.

Several years later, John unfortunately passed away due to a heart-related issue. When his beneficiaries filed a claim, the insurance company discovered the undisclosed medical condition. As a result, they rescinded the policy, denying the claim and leaving John’s family without the financial support they expected.

Case Study 2: Sarah’s Incomplete Smoking History

Sarah, a 35-year-old non-smoker, applied for a health insurance policy. On the application, she was asked if she had smoked in the past five years. Even though she had quit smoking four years ago, her agent advised her not to mention it. Sarah trusted her agent’s advice and left the question unanswered.

The underwriter issued the policy based on the incomplete information. Later, Sarah developed a severe respiratory illness and required expensive medical treatment. When she submitted a claim, the insurance company investigated her medical history and discovered her past smoking habit. They rescinded the policy, leaving Sarah responsible for the mounting medical bills.

Case Study 3: Mark’s Application Manipulation

Mark, a 50-year-old individual, wanted to secure a disability insurance policy. He intentionally manipulated his application, providing false information about his medical history to obtain lower premium rates. The underwriter, relying on the fraudulent information, approved the policy.

A few years later, Mark suffered a disabling injury that prevented him from working. When he submitted a disability claim, the insurance company initiated a thorough investigation and uncovered the fraudulent application. They immediately canceled the policy, denying Mark’s claim and leaving him without the expected disability benefits.